Trump's payroll tax deferral will likely turn into a tax cut that threatens SS benefits over the long term

I wanted to make two quick points on Trump's executive order deferring payroll taxes until the end of the year.  If this goes through and companies actually stop withholding payroll taxes, then when the time comes in January of 2021 when people have to pay the money back, Congress will basically have no choice but to turn those payroll tax deferrals into actual tax cuts.  The reason is simply that people are subject to loss aversion, which is an insight from behavioral economics that tells us that losses are felt twice as strongly as similarly sized gains.  Politically, that means it is relatively easy to oppose the deferral before it takes effect because politicians are trying to block a future gain, but once people see the money in their pocket then making people pay back all the deferred taxes at the beginning of next year will be seen as a loss and felt twice as powerfully.  This is why new spending programs or new tax cuts are difficult to enact, but once they take effect they are extremely difficult to get rid of.  I have a whole working paper (fairly technical) about how loss aversion affects the desire for governments to keep running budget deficits, which really is quite good.

Once we realize that Trump's payroll tax deferral will most likely eventually turn into a payroll tax cut, then we need to ask what impact will this have on Social Security benefits.  By not replacing the decline in payroll tax revenues with a similarly sized transfer from the general fund (as Obama did when he cut payroll taxes), Trump is essentially raiding the Social Security Trust Fund to pay for the extra stimulus provided to individuals during this crisis.   If the Social Security Trust Fund has less money, then this significantly reduces the mount of time it will take for the program to run out of money.  This likely will not have any immediate impact on Social Security benefits, but after the pandemic is over Republicans will point to the dismal state of Social Security's finances and declare an emergency that requires drastic cuts to Social Security benefits over the long run even though they were the ones to cause the problem in the first place by using Social Security Trust Fund money to pay for new stimulus.  Republicans do this all the time, where they say we have plenty of money to enact big tax cuts, but then once the tax cuts pass and the deficit goes up, they say we need to cut back on entitlements like Social Security and Medicare in order to deal with the deficit problem they themselves created.

The important takeaway from this post is that any payroll tax deferral will likely eventually turn into an actual payroll tax cut, and if the loss in revenue from the payroll tax cut is not replaced with transfers from the general fund, the worsening of Social Security's financial situation will likely be used as an excuse to cut Social Security benefits over the long run once the crisis is over.  Do not be fooled by this bait and switch.  Republicans are always looking for ways to cut entitlements and raiding the Social Security Trust Fund to pay for stimulus now is one way to make it easier for them to do that in the future.